RBI entry in currency futures may hit rupee moves

MUMBAI: The thriving derivatives trading in the Indian Rupee suddenly faces an existential threat - not because of unnerving volatility, but probably due to likely reduction in it, thanks to the Reserve Bank of India's (RBI) decision to intervene in the currency futures. The central bank's entry into the currency futures market is bound to reduce excessive movements in the rupee, which these traders thrive on, besides narrowing the wide difference that the local unit trades at between the onshore and offshore, or unregulated non-deliverable forwards market, say traders.

"I would assume a greater number of traders are done by prop or day traders since this segment (currency futures) does not attract securities transaction tax,'' said Rajesh Baheti, MD, Crosseas Capital, which runs proprietary trades across exchange traded assets.

"They would obviously be hit by a decline in volatility but what's bad for them is actually a boon for actual users as their underlying currency risk and volatility come under control." Governor Raghuram Rajan last month shocked retail currency traders when he announced that the central bank would also trade in the currency derivatives market to "manage excessive volatility and to maintain orderly conditions......"

While the move may help the regulator to smoothen out the fluctuations in the market it would essentially deprive arbitrageurs the opportunity to profit from differential rates in different markets.

Indeed, in its December bulletin, the banking regulator revealed its purchase and sale of $355 million in the currency futures market in September. Traders speculate that some banks, on behalf of RBI have demanded higher trading limits so that they could move the market. RBI and Sebi did not respond to an ET query on the former's request for higher exposure limits.

Currently an exchange member had exposure limit of 15% of marketwide open interest.

Currency derivatives trading since introduced in August 2008 on NSE has grown with annual/daily trading volume averaging Rs 16,915 crore in FY16 (Apr-Jan), from justRs 1,167 crore in FY09. During this period, the interest really surged in 2013 when the Indian rupee was pummelled when the former US Federal Reserve Chairman Ben Bernanke's comment on tapering quantitative easing roiled global markets.

Jamal Mecklai, CEO of risk management consultancy Mecklai Financial Services, said punters were bound to be "disappointed" as currency futures were largely a "trader's market" rather than an actual user's one.

"The exchanges say their currency platforms offer transparent price discovery and that small and medium sized corporates who might not get the best rates that banks offer to premium customers can get the same here, thanks to contracts which enjoy competitive bid-ask spreads,'' said Mecklai.

"But, since dollars cannot be delivered on exchanges, users will ultimately need the banks to exchange dollars for rupees or the other way round. So, a majority of the participants tend to be traders who thrive on volatility."